From PLI s Course Handbook Ninth Annual Private Equity Forum #14028 8 SUMMARY OF PRINCIPAL TERMS Jennifer J. Burleigh Debevoise & Plimpton LLP Copyright 2007 Attachment I: Copyright 2006 Peter K. Yu. Reprinted with permission of the author Attachment II: Copyright 2005 Peter K. Yu. Reprinted with permission of the author.
SUMMARY OF PRINCIPAL TERMS The following is a summary of the principal terms of [Name of Fund] LP (the Fund ). This summary is qualified in its entirety by reference to the Amended and Restated Limited Partnership Agreement of the Fund and the Subscription Agreements relating to the purchase of interests therein ( Interests ), both of which are available upon request and should be reviewed carefully prior to making an investment decision. The offer made hereby is subject to modification, prior sale and withdrawal. The Fund Investment Objective The General Partner The Manager Capital Commitments [Name of Fund] LP, a Delaware limited partnership. Portfolio investments are expected to consist primarily of equity and equity-related securities in transactions where the Fund and its affiliates intend to have a controlling or significant equity position. The Fund may also make minority investments or invest in publicly-traded equity and equity-related securities, public or private debt securities, partnerships or other entities and instruments related to the foregoing. The Fund expects to make investments primarily in the United States and Canada. [Name of GP], LP, a Delaware limited partnership, is owned by [Names of Principals] (the Principals ). The Principals will be solely responsible for the investment decisions and day-to-day operations of the General Partner. [Name of Manager], LLC (the Manager ) will provide portfolio management and administrative services to the Fund, including investigating, analyzing, structuring and negotiating potential investments, monitoring the performance of portfolio companies and advising the Fund as to disposition opportunities. The Fund is seeking capital commitments (the Capital Commitments ) totaling $[ ] million. The General Partner retains the right to accept total Capital Commitments in excess of this amount.
Minimum Capital Commitment General Partner s Capital Commitment Closings Subsequent Closing Payments Drawdowns The minimum Capital Commitment for a limited partner of the Fund (collectively, the Limited Partners, and together with the General Partner, the Partners ) is $[ ] million. The General Partner reserves the right to accept Capital Commitments of lesser amounts. The General Partner and certain of its affiliates will commit to participate in the Fund s investment program in an amount equal to at least $[ ] million. The Principals will invest a substantial portion of their personal net worth in the Fund, either through the General Partner or through a limited partner interest. The General Partner will establish the Fund as soon as practicable (the Initial Closing ). From time to time after the Initial Closing (but no later than twelve months thereafter), one or more additional closings (each, together with the Initial Closing, a Closing ) may be held as necessary to accommodate the admission of additional Limited Partners. Limited Partners admitted to the Fund subsequent to the Initial Closing generally will participate in the investments, if any, made by the Fund prior to their admission. Such Limited Partners generally will contribute to the Fund an amount equal to their proportionate share of all funded Capital Commitments of Partners admitted in prior Closings, plus additional amounts computed as interest thereon at the prime rate plus 2% from the date of each applicable funding. The amount contributed by such Limited Partners (other than amounts attributable to the Management Fee (as defined below) and the interest thereon, which will be paid over to the Manager) generally will be refunded to the previously admitted Partners and, other than the interest component, may be drawn down again by the Fund. For this purpose, investments will be valued at cost, unless the General Partner in its sole discretion determines that there has been a material change or significant event relating specifically to a portfolio company that would justify a different valuation. Capital Commitments will be drawn down by the Fund pro rata from the Partners as needed to make investments and to pay Fund liabilities and expenses with not less than 10 days prior written notice. 2
Investment Period Reinvestment Diversification Borrowing Distributions The Fund may draw down Capital Commitments from the Partners to make investments at any time during the period from the Initial Closing through the fifth anniversary of the last day of the month of the Initial Closing (the Investment Period ). After the end of the Investment Period, the Partners will be released from any further obligation with respect to their unfunded Capital Commitments, except to the extent necessary to (i) fund the Management Fee (as defined below) and other Fund liabilities and expenses throughout the term of the Fund, (ii) complete Fund investments that are in process as of the end of the Investment Period and (iii) make follow-on investments in existing portfolio companies in an aggregate amount up to 15% of total Capital Commitments. Distributions in amounts equal to both (i) capital invested by the Fund and realized within 18 months of such investment and (ii) capital funded to pay Fund expenses or organizational expenses, may be drawn down again by the Fund. The Fund will invest no more than [ ]% of total Capital Commitments in a single portfolio investment, and no more than [ ]% of total Capital Commitments in investments headquartered outside of the United States and Canada. The Fund may borrow on a short-term basis to make investments or to pay expenses pending receipt of drawdowns, but does not expect otherwise to borrow directly in its investment program. Net proceeds attributable to the disposition of a portfolio investment, distributions in kind of securities and any dividends, interest or other income received with respect to a portfolio investment, will be distributed to all Partners participating in such portfolio investment. Each such Partner s proportionate share of any such distributions generally will be distributed as follows: 3
(a) Return of Capital: First, 100% to such Partner until the cumulative distributions to such Partner equal the sum of: (i) the capital contributions of such Partner used to acquire realized portfolio investments, plus such Partner s proportionate share of any net write-downs of unrealized portfolio investments, as of that time; and (ii) the capital contributions of such Partner used to pay organizational expenses and other Fund expenses, including the Management Fee, allocated to the investments then described in subparagraph (i) above; (b) (c) (d) Preferred Return: Second, 100% to such Partner until the cumulative distributions to such Partner are sufficient to provide such Partner with an 8% internal rate of return, compounded annually, on the capital contributions of such Partner then described in paragraph (a) above; Catch Up: Third, 100% to the General Partner until the General Partner has received in respect of such Partner 20% of the excess of (i) the cumulative distributions made to such Partner and to the General Partner in respect of such Partner over (ii) the capital contributions of such Partner then described in paragraph (a) above; and; and 80/20 Split: Thereafter, 80% to such Partner and 20% to the General Partner (the distributions to the General Partner described in paragraph (c) and this paragraph (d) being referred to as the General Partner s Carried Interest ). All distributions not directly attributable to a particular portfolio investment generally will be made to the Partners in proportion to their funded Capital Commitments. Distributions prior to the dissolution of the Fund will be made in cash or marketable securities. Upon dissolution of the Fund and subject to applicable law, distributions may also include restricted securities or other assets of the Fund for which the General Partner generally will seek a valuation from independent experts. Notwithstanding the foregoing, the Fund may make tax distributions to the Partners in respect of gain and other income 4
from portfolio investments in accordance with the manner in which such gain and other income is allocated to the Partners. General Partner Clawback All Partner Giveback Management Fee Upon termination of the Fund, the General Partner will be required to return to the Fund distributions of Carried Interest previously received to the extent that they exceed the amounts that should have been distributed to the General Partner as Carried Interest pursuant to Distributions above applied on an aggregate basis covering all transactions of the Fund. In no event, however, will the General Partner be required to return more than the cumulative Carried Interest distributions received by the General Partner, net of income taxes thereon. The General Partner may, subject to certain limitations, require the Partners to return certain distributions for the purpose of satisfying any Fund obligations or liabilities. Through the end of the Investment Period, the Manager will receive an annual management fee (the Management Fee ) equal to 2.0% of Capital Commitments. Thereafter, the Management Fee will be 1.5% of invested capital. The Management Fee will be subject to reduction as necessary to give effect to the General Partner s Capital Commitment described above, and will be subject to further reduction as provided below in Organizational Expenses and Fee Income. The Management Fee will be payable quarterly in advance and may be paid out of current cash flow, disposition proceeds of the Fund or from drawdowns of unfunded Commitments. Organizational Expenses Other Expenses The Fund will bear all legal and other expenses incurred in the formation of the Fund and the offering of the Interests (other than any placement fees), up to an amount not to exceed the greater of $[ ] million and [ ]% of Capital Commitments. Organizational expenses in excess of this amount, and any placement fees, will be paid by the Fund but borne by the Manager through a 100% offset against the Management Fee. The Manager will pay all normal operating expenses incidental to the provision of day-to-day administrative services to the Fund, including its own overhead and all ordinary operating expenses incurred in the preliminary investigation of investments. To the extent possible, third-party costs will be charged to portfolio companies. The Fund will pay all costs, expenses and liabilities in 5
connection with its operations, including: fees, costs and expenses related to the consummated and unconsummated investments; taxes; fees and expenses of accountants and counsel; costs and expenses of the Advisory Committee and the annual meeting; litigation expenses; and other extraordinary expenses. Fee Income Advisory Committee Other Funds Transfers and Withdrawals The Manager and its affiliates may charge portfolio companies directors fees, transaction fees, monitoring fees, advisory fees, break-up fees and other similar fees. An amount equal to 80% of all such fees, and 100% of all directors fees paid by portfolio companies that are received by the Manager or any of its employees, net of any unreimbursed expenses incurred by the Manager or its affiliates in connection with unconsummated transactions, will be applied to reduce the Management Fee otherwise payable. Management Fee reductions will be carried forward if necessary. The Fund will establish an Advisory Committee consisting of members not affiliated with the General Partner selected from among the Limited Partners. The Advisory Committee will meet as required to consult with the General Partner as to potential conflicts of interest and methods of valuation. Subject to applicable law, the Fund will indemnify the members of the Advisory Committee for their services as such and will reimburse the members for their reasonable out-of-pocket expenses incurred while acting in such capacity. The Manager generally will not admit investors to another investment fund with investment policies substantially similar to those of the Fund until the earlier of (i) the end of the Investment Period and (ii) the date on which at least 75% of the Fund s Capital Commitments have been contributed to the Fund or committed to be invested (including amounts reserved to make follow-on investments in existing portfolio companies or to provide for Fund expenses). Limited Partners generally may not sell, transfer or pledge their Interests except as permitted by the Partnership Agreement and with the consent of the General Partner. Limited Partners generally may not withdraw from the Fund. 6
Key Termination Person If any two of [Names of Principals] cease, for any reason, to devote substantially all of their business time to the investment activities of the Manager, then 66 % in interest of the Limited Partners may elect to terminate the Investment Period. Upon the departure of any Principal, the General Partner will have the right to designate a qualified replacement who will become a Principal upon the consent of the Advisory Committee. No Fault Termination Reports/Annual Meeting Feeder Vehicles Alternative Investment Vehicles At any time after the Initial Closing, 80% in interest of the Limited Partners may elect to terminate the Investment Period. Annual audited and quarterly unaudited financial statements of the Fund and quarterly progress reports on each portfolio company of the Fund will be provided to each Limited Partner. U.S. federal income tax information will be provided annually. The Fund will hold annual meetings to provide Limited Partners with the opportunity to review and discuss with the Manager and its employees the Fund s investment activities and portfolio. In order to facilitate investments by certain non-u.s. investors, certain U.S. tax-exempt investors and certain other investors, the General Partner may form one or more feeder vehicles through which such investors will invest in the Fund. Substantially all of the assets of any such feeder vehicles will be contributed to the Fund. The General Partner will have the right in connection with any investment to direct the capital contributions of some or all of the Partners to be made through one or more alternative investment vehicles if, in the judgment of the General Partner, the use of such vehicle or vehicles would allow the Fund to overcome legal or regulatory constraints or invest in a more tax efficient manner and/or would facilitate participation in certain types of investments. Any alternative investment vehicle will contain terms and conditions substantially similar to those of the Fund (except as may be required by such legal, regulatory or tax concerns) and will be managed by the Manager or an affiliate thereof. The profits and losses of an alternative investment vehicle generally will be aggregated with those of the Fund for purposes of determining distributions by the Fund and such vehicle, unless the General Partner elects otherwise based on a determination that such aggregation would increase the risk of any adverse tax or other consequences. 7
Parallel Funds Indemnification The General Partner may establish one or more parallel funds to accommodate the investment requirements of certain investors. Any such parallel fund generally will invest side-by-side with the Fund in all portfolio investments on the basis of available capital, will contain terms and conditions substantially similar to those of the Fund (except as necessary to accommodate such investment requirements) and will be managed by the Manager or an affiliate thereof. Any parallel fund will be responsible for its pro rata share of expenses. Subject to applicable law, none of the General Partner, the Manager, the Principals, their respective affiliates or the directors, officers, partners, members, employees or agents of each of them or the members of the Advisory Committee (each, a Covered Person ) will be liable to the Fund or the Limited Partners for any good faith act or omission of such person relating to the Fund, except for any such act or omission constituting gross negligence, fraud, willful malfeasance or reckless disregard of duties by such Covered Person. Subject to applicable law, the Fund will indemnify each Covered Person against all claims, damages, liabilities, costs and expenses, including legal fees, to which they may be or become subject by reason of their activities on behalf of the Fund, or otherwise relating to the Partnership Agreement, except to the extent that such claims, damages, liabilities, costs or expenses are determined to have resulted from such person s own gross negligence, fraud, willful malfeasance or reckless disregard of duties. Removal of the General Partner If the General Partner is found to have engaged in certain disabling conduct, a majority in interest of the Limited Partners may elect to remove the General Partner. Default Side Letters A Limited Partner that defaults in respect of its obligation to make capital contributions pursuant to the terms of the Partnership Agreement will be subject to customary default provisions, including forfeiture of a portion of its Interest. The General Partner, on its own behalf or on behalf of the Fund, may enter into side letters or other written agreements with any Limited Partner that have the effect of establishing rights under, or altering or supplementing the terms of, the Partnership Agreement with respect to such Limited Partner. 8
Term Tax Considerations The term of the Fund will be 10 years, subject to up to three consecutive additional one-year extensions as determined by the General Partner with the consent of the Advisory Committee to allow for the orderly liquidation of the Fund s investments. The Fund will be structured to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund generally will not be subject to U.S. federal income tax, and each Partner subject to U.S. tax will be required to include in computing its U.S. federal income tax liability its allocable share of the items of income, gain, loss and deduction of the Fund, regardless of whether and to what extent distributions are made by the Fund to such Partner. See Section X. Certain Regulatory and Tax Matters Certain U.S. Federal Income Tax Considerations below. The taxation of partners and partnerships is extremely complex. Each prospective investor is urged to consult its own tax advisor as to the tax consequences of an investment in the Fund. This summary was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax law. This summary was written to support the promotion or marketing of the Fund. Each taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. ERISA Considerations In order to avoid having the Fund s assets be deemed to be plan assets for purposes of the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), the General Partner presently intends to operate the Fund so as to either (i) qualify the Fund as a venture capital operating company (within the meaning of Department of Labor regulations) or (ii) limit investment in the Fund by benefit plan investors (within the meaning of Department of Labor regulations as modified by section 3(42) of ERISA) to less than 25% of each class of equity interests in the Fund. See Section. Certain ERISA Considerations below. Each prospective investor subject to ERISA is urged to consult its own advisors as to the provisions of ERISA applicable to an investment in the Fund. Investment Considerations and Potential Conflicts of Interest An investment in the Fund involves significant risks and potential conflicts of interest, certain of which are described in more detail in Section IX Certain Investment Considerations below. Each prospective investor should carefully consider and 9
evaluate such risks and conflicts prior to purchasing an Interest. Counsel to the General Partner Auditors Placement Agent [Name of Counsel.] [Name of Auditor.] [Name of Placement Agent.] 10